HDFC Bank has sustained its robust financial performance despite losses on its investment portfolio. Strong growth in the company's assets continues to be the main driver. For 2QFY05, while the topline has risen by 15% YoY, the bottomline has increased at a faster rate (30% YoY). The bank continues to keep its interest costs low and this has significantly helped the growth in net interest income. Other income has improved indicating that the bank has managed to improve its fee-based income and has more than compensated for the losses from its investment portfolio.
Income from operations
Net interest income
Operating Profit Margin (%)
Provisions and contingencies
Profit before Tax
Profit after Tax/(Loss)
Net profit margin (%)
No. of Shares (m)
Diluted earnings per share (Rs)*
P/E ratio (x)
What is the company’s business?
HDFC Bank, India's premier private sector bank, promoted by HDFC, has established a strong presence in both retail and corporate finance. The bank also has active treasury and capital market operations. The bank has a wide reach across the country with a branch network of 379 branches and over 900 ATMs. It is acknowledged as one of the most efficient private sector banks in the country. The bank has recently entered in to an agreement with parent HDFC to retail the home loans product of the latter.
What has driven the performance in 2QFY05?
Kicker from retail advances: The bank continues to rapidly grow its advances portfolio (38% YoY), with retail assets growing at a faster rate of 69%. Retail assets now account for over 42% of the total advances of the bank (32% in 2QFY04). The topline growth has been slower in 2QFY05 compared to its earlier quarters. This may be due to lower yields on incremental advances that the bank is disbursing. Going forward, with non-food credit growing at a faster pace, we believe that the corporate advances side will gain momentum.
Operating margins: Due to reducing deposit costs, the bank continues to maintain its net interest income growth (savings deposits account for over 29% of total deposits as compared to 24% in 2QFY04). Net interest margins (NIM), on the other hand, have remained steady at 3.8%, which is likely to have peaked, in our view for the reason that follows. The fall in the cost of deposits is likely to have bottomed out, as HDFC Bank has one of the lowest cost of deposits. We believe that it may be difficult for the bank to further improve upon its NIM from the current levels, going forward. On the other hand, we continue to witness improvement in the bank's operating margins despite higher growth in its operating expenses. The bank has added 67 new branches, taking the tally to 379. Since corporate advances are likely to grow at a faster clip, there will some support to the overall margins, as these typically have a better margin profile.
Higher fee-based income protects the bottomline:
The main highlight of the bank's performance in the September quarter has been the strong growth in its other income despite losses in its investment portfolio. The bank's fee and commission income have risen by over 71% in 2QFY05, while its forex exchange and derivatives revenues have fallen. HDFC Bank's losses on its investment portfolio stood at Rs 266 m in 2QFY05 (around 17% of net profits) as compared to 188 m in the same period last year. The growth in HDFC Bank's other income is indicative of its extremely low reliance on profits from its investment portfolio. The losses are mainly on account of the transfer of securities to the HTM (Held to Maturity) category from the AFS (Available for Sale) category. The RBI permitted this transfer for the banking sector in order to mitigate the adverse effect of any rise in interest rates on the investment portfolio of banks.
The net NPA to advances ratio has been maintained at 0.2%, which is one of the lowest in the industry. Due to the strong growth in the topline, higher other income and improving operational efficiencies, HDFC Bank has managed to once again post a 30% rise in net profits for the September quarter. In the process, it has outperformed most of the other banks.
What to expect?
At the current market price of Rs 403, HDFC Bank is trading at a price to book value multiple of 3.8 times adjusted book value. The bank's valuations more than reflect its growth potential in the medium term. However, due to the news regarding the bank's expected ADS (American Depository Shares), the stock price has risen sharply in the last two weeks. The banks' ADS issue (US$ 300 m) will enable the bank to fund its expansion plans as well as increase the book value.
HDFC Bank declared the results for the third quarter of financial year ending March 2017 (3QFY17). The bank has reported 18% YoY and 15% YoY growth in net interest income and net profits respectively in 3QFY17.
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